News Column

Advances by Iraq militants send oil price soaring to three-month high

June 13, 2014

Sean Farrell



Escalating violence in Iraq sent the price of oil to a three-month high as traders bet that advances made by insurgents could disrupt supplies from one of the world's largest oil exporters.

Brent crude futures rose 2% to $112.12 a barrel, the highest price since early March. The initially calm response to Sunni militants' overruning of Mosul, Iraq's second largest city, on Tuesday turned to alarm as Isis, the al-Qaida splinter group, announced its intention to take Baghdad.

The prospect of rising oil prices because of the turmoil in Iraq prompted concerns about wider price rises that could force central banks to increase interest rates to curb inflation. That move in turn could put the brakes on economic recovery in the US and the UK.

Chris Beauchamp, analyst at financial spread better IG, said: "The longer-term worry is the impact of higher oil prices on inflation readings for major economies.

"With inflation edging up in the US there will be concerns that CPI [consumer price index] growth might get out of hand and force the Federal Reserve to take action. This is the worst-case scenario, but markets are more than capable of focusing on that to the exclusion of all others."

Concerns that the Iraqi army, controlled by the Shi'ite-led government in Baghdad, was collapsing grew after soldiers left the northern oil city of Kirkuk in the control of Kurdish forces. However, most of Iraq's oil production and export activities are in the largely Shi'ite south of the country, where al-Qaida influence is minimal.

Iraq's oil minister, Abdul Kareem Luaibi, said the facilities, which produce about 2.6m barrels a day, were "very, very safe".

The AA advised motorists not to panic and said the short-term effect on prices at pumps was likely to be small. It pointed out that when the US considered military action against Syria in September the price of petrol rose by just 1p a litre. Unleaded petrol costs about 130p per litre in the UK, with diesel costing 137p per litre.

The AA said: "A short-term surge in the oil price no longer guarantees that pump prices will shoot up 8p or 10p a litre as they did during 2011 to 2013."

Despite the volatility in the market, Opec predicted oil markets would be balanced in the second half of the year as extra production met growing demand.

Energy shares led the FTSE 100 index on speculation that rising prices would feed through to profits. BG Group, which does not have a presence in Iraq, rose 2.5%. BP and Royal Dutch Shell, which have operations in the country, gained 0.7% and 0.5% respectively.

The turmoil in Iraq also prompted buying of gold and silver, whose prices had collapsed as fears of a financial meltdown receded and hopes of recovery grew.



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Source: Guardian (UK)


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